El Salvador was downgraded by Moody’s

CENTRAL AMERICA - In Brief 02 Aug 2021 by Felix Delgado

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The rating agency Moody’s downgraded El Salvador’s bonds from Ba3 to Caa1 on July 30th, 2021, turning the country’s debt into the category of “junk bonds”. At the same time, the outlook was rated “negative”. The same grade was also granted by Moody’s in April 2017, when the government failed to pay for the pension debt. A few weeks ago, the agency warned about the delay of negotiations with the IMF for a medium-term facility to help the country address the fiscal weaknesses prevailing for several years. We also adopted a similar posture in our last three reports, casting doubts about the compatibility of some recent political decisions with the expected conditionality of an agreement with the IMF. Moody’s considered that fiscal conditions remain weak and vulnerable, endangering the government’s payment capacity. Financing options have narrowed and uncertainty persists about the possibility to reach a deal with the IMF in the short term. The two most highlighting political decisions were the dismissal of the Constitutional Court judges the same day that new Congress took office, and the approval of the Bitcoin Law, giving legal tender to bitcoins in El Salvador. Moody’s announcement was certainly not surprising. The capacity of the government to finance its requirements in the local financial market has progressively reduced, as reflected by recent auctions where the government has been forced to pay higher interest rates and accept terms lower than those offered. In our opinion, the country seems to be addressing the fiscal weak conditions and financing requirements on a one-day-at-a-time basis, judging by the lack of publicly known main and alternative plans to cope w...